Harvey Jones
14.02.2019
Own a property back home? This is what you need to know
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Owning a second home overseas is a pleasure and a privilege, but it may not feel that way if you are fretting over how to manage one of them when you’re thousands of miles away.
Many people dream of having a foreign bolthole and expats are most likely to make it come true, often by retaining a property in their home country while buying a second in their land of residence. However, juggling two or more properties is also a responsibility, with insurance, maintenance, finance and tax just some of the challenges you have to face.
While many expats rent out their homes to generate income and keep it inhabited, this also involves time and effort. Dealing with tenants is never easy and you can’t simply hop on a long-haul flight to fix a dripping tap or plug a leaky roof.
This is a nice problem to have and you won't get much sympathy, but it's a problem nonetheless. Nothing you can’t handle, though, provided you plan ahead.
Currency
You will typically have to make regular currency transfers to cover mortgage payments, maintenance, repairs and local taxes, and this adds a layer of risk and expense.
It leaves you at the mercy of foreign currency movements, unless, say, you are resident in Dubai earning dollar-pegged dirhams, and sending money back to the US.
There are times when currency swings can work in your favour. For example, British expats have enjoyed sending money back to the UK since the Brexit referendum hammered sterling.
At other times it could work against you, and you need to be prepared. The first thing is to avoid transferring currency via your bank, especially for large sums. It may boast zero commission but will sting you on the exchange rate instead.
My own bank’s website automatically prompts me into accepting its dismal FX rate, which would swallow around 3.5 per cent of any transfer. If I did that I would hand over around $350 of every $10,000. Sensibly, I don’t. Currency transfer specialists can give you a better deal, but compare rates carefully before choosing one – and watch out for hidden fees too.
These sites can also protect you against currency risk by setting up a regular monthly transfer, which can typically run for a maximum two years.
It can be a good idea to lock in when exchange rates have moved in your favour, less so when they are down in the dumps. Just remember that exchange rates on regular payments are lower than on spot transfers. A mix and match approach may work best, especially for those transferring larger sums. Set up a series of monthly transfers running over different time periods, then make spot transfers when the price is right. Just don't use your bank.
Get the best rate
If you have a mortgage on your property back home, you should review it regularly to see if you are still getting a competitive deal.
Global interest rates have been at rock bottom levels for a decade, but they are slowly starting to rise. If that would put pressure on your finances, you might consider locking into a long-term fixed rate mortgage.
A good broker can search the market on your behalf, but make sure they speak the same language as you. This applies to all professional advisers.
Take proper cover
It hardly needs stating that home insurance is essential, but you cannot rely on your old policy.
Standard policies typically won’t cover a home that is left empty for more than 30 days, or is rented out, so you will need a specialist insurer.
An empty home is at greater risk from break-ins, burst pipes or extreme weather. A good insurance policy will cover these risks, and possibly even the cost of a return flight following an emergency or disaster, such as fire or flood.
If you rent out your property, you need landlord insurance too. That should cover accidental or malicious damage by tenants, and legal costs in case of contract disputes or repossession.
It should also cover loss of rental income if your home is left uninhabitable after being damaged. Check the policy carefully, because some only cover bookings that have already been made.
You may also need public liability insurance in case tenants are injured, and possibly employers’ liability insurance if you hire gardeners and cleaners to look after your property.
Tell your mortgage lender if you are letting out your home, and obtain its consent. Otherwise you could breach its terms and conditions.
Choose your agent
Letting out your property will be a lot easier if you use a third-party agent to find tenants, sign contracts, prepare inventories, secure deposits, chase rent, maintain the building and handle repairs.
This is not cheap, you will typically pay between 12% and 15% of the annual rent.
Grill your chosen agent carefully to find out how they will market your property, screen tenants and chase any arrears, and how many inspections they will make. Also check whether their fees include VAT.
Who does the tenant call in an emergency? It won't help dragging you out of bed in a different time zone on the other side of the world. You need boots on the ground.
If you find good and reliable tenants, show them some love. Maybe even give them the odd rent freeze. It will give you a warm glow, and may be a lot cheaper than hunting around for new tenants every six or 12 months.
Beware tax
The biggest downside is that an overseas property will probably mean an overseas tax liability too.
You may be tax resident overseas but any rental income you generate will be taxed locally, although you can deduct expenses. You also have to plan for local property and government taxes.
When you finally sell the property, you may have to pay local tax on your capital gain as well, depending on the jurisdiction.
Worse, tax rules change all the time, and many governments have also slapped new taxes on foreign-based owners, including the UK, Canada and New Zealand.
Owning assets in different countries also raises a host of complex questions around probate, estate duties and inheritance tax.
This is where you may need specialist tax advice to avoid becoming unstuck.
You should also seek professional help writing in a will, or setting up a power of attorney in case you lose mental capacity to make financial decisions yourself.
Once you have all these things under control, you can enjoy the rare privilege of having two or more homes around the world. You will have worked hard for it.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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